31 May, a significant date for both accountants and tax consultants, is getting ever closer. Hungarian companies with a financial year of the calendar year have to submit their annual financial statements and corporate tax returns by this deadline. For related companies, the date for submitting their corporate tax return is also the date for preparing transfer pricing documents. From this perspective, the end of May 2019 will be more significant than ever before. This is because Hungarian enterprises with a financial year of the calendar year now have to prepare their transfer pricing documentation according to the new transfer pricing documentation decree for the first time. Below we discuss the most important aspects of the new transfer pricing regulation.
What does the new transfer pricing regulation mean, and why was it necessary?
Decree No. 32/2017 of the Hungarian Ministry of National Economy was promulgated on 18 October 2017. It is referred to as the new transfer pricing documentation decree, and it replaced Decree No. 22/2009 of the Ministry of Finance. The new regulation was necessary to achieve the goals included in the BEPS action plan, namely, to curb the aggressive tax planning and tax evasion efforts of multinational enterprises. Bearing these goals in mind, after implementing the rules on country-by-country reporting, Hungary incorporated the requirements of the master and local files into its rules as part of the new transfer pricing documentation decree.
From when should the rules of the new transfer pricing documentation decree be applied?
The requirements of the new transfer pricing documentation decree must be applied for the first time in relation to documentation for tax liabilities for fiscal years beginning in 2018. Essentially, this means that companies that are obliged to prepare transfer pricing documentation and whose financial year tallies with the calendar year have to prepare their documentation with the expanded content as per the new decree by the end of May 2019.
What are the most important changes?
One of the most important changes is that from 2018 the new transfer pricing documentation decree terminated the option to prepare independent documentation, and made it mandatory to prepare two separate documents, the master file and the local file.
What is the master file, what does it have to contain, and what should we pay attention to when preparing it?
The master file basically contains detailed information for the entire company group. So among other things, this document must present the supply chain for the group’s five largest products and services and the products and services with a turnover exceeding 5% of the group’s turnover, broken down by sales revenue, a brief description of intragroup services that qualify as significant, and a description of intragroup financing, to mention but a few of the many mandatory elements.
It is also important to mention for the master file that the Hungarian legislation follows the requirements of the OECD guidelines on the mandatory elements of the master file. This means that, given compliance with the OECD rules, the master files prepared at the group’s headquarters most often contain all the information required by Hungarian legislation. However, caution is advised and you are better to check the documentation prepared by your parent company, since even one missing element can provide an excellent reason for the tax authority to levy a default penalty.
Have the contents of the local file changed?
The new transfer pricing documentation decree requires more data in the local file too. In addition to the current content, when presenting the taxpayer you need to show the management structure, an organisational diagram, and the names of the individuals who report to the management. Additionally, the most important competitors of the enterprise have to be listed and the local file has to include a concise description of how the financial data used when applying the method to establish arm’s length prices can be linked to the data included in the taxpayer’s annual financial statements.
When should the transfer pricing documentation be prepared by?
Similar to the previous rule, the local file must be compiled by the submission date of the corporate tax return, but it does not have to be submitted to the tax authority. The new transfer pricing documentation decree enables the local file to be considered the documentation for a period of 12 months from the last day of the taxpayer’s fiscal year (also bearing the parent company’s deadlines in mind), until the master file is available. However, it is important that this rule does not apply to cases where the parent company is Hungarian and it prepares the master file, or when the foreign parent company does not prepare a master file, for whatever reason, and thus the Hungarian related company has to prepare it instead. In this case, the master file has to be completed by the submission date of the Hungarian corporate tax return.
What should you look out for in respect of intragroup services of low added value?
The new transfer pricing documentation decree retained the option for related companies to prepare simplified transfer pricing documentation for certain intragroup services. Both the range of services and the value and percentage limits defined under the conditions remained unchanged. However, the upper limit of the applicable mark-up changed from 10% to 7%, while the lower limit remained at 3%.
Ability to make modifications
One important and favourable change in the new transfer pricing regulation is that within the limitation period and until the start of any tax authority inspection, taxpayers can modify their transfer pricing documentation if they discover that they did not prepare the documentation according to the legal regulations, or if they detected an error affecting the tax base, the tax, the arm’s length price and the arm’s length price range (profitability) in the documentation. The modifying document must designate the documentation affected by the modification along with the modification and its date. The modification has to be performed according to the rules valid as of the original due date of the documentation, but no modification may be made if the taxpayer lawfully opted for one of the possibilities in the decree, and would change this with the modification. In practice this means, for example, that the selected method to define the arm’s length price cannot be changed with a self-revision.
What didn’t change…
The size of the penalty for incomplete documentation will not change in the case of transfer pricing documentation prepared for 2018. It is still very high, i.e. it can amount to HUF 2 million (roughly EUR 6,160) per incomplete document, and as much as HUF 4 million (roughly EUR 12,320) in the case of a repeated failure to comply with the laws.
You do not have to prepare documentation on product and service sales recharged without a mark-up, provided that you transacted with an independent party. However, it is important that if the re-charging is carried out for several related parties, the taxpayer will only be exempted from the documentation obligation as per the new transfer pricing documentation decree if it is substantiated that the distribution method applied – with due consideration of the facts and conditions characteristic of the particular transaction – complies with the arm’s length price principle.
The transfer pricing consultants of WTS Klient Hungary have considerable experience in preparing these documents and in successfully supporting tax authority inspections, including, among others, industry knowledge on how to manage and support transactions of suppliers in the automobile sector and their tax inspections. As a member of WTS Global’s transfer pricing advisory team, we offer solutions for all kinds of transfer pricing problems at international level. Please do not hesitate to get in touch.